News Room

Key Points From Mboweni’s Mid-Term Budget Speech

Author: Jason Snyman
Date: 2018-10-26
Newly-appointed finance minister, Tito Mboweni, has delivered his maiden mid-term budget speech. Things appear to be grim for South Africa's economy, but do we have a plan to fix it?

Our newly-appointed Finance Minister, Tito Mboweni, delivered his maiden mid-term budget policy speech this week. Needless to say, the economy is in pretty grim shape, and it doesn’t seem as if things are going to be getting too much better in a hurry.

Mboweni’s growth forecast has almost halved that of the Treasury’s, while at the same time, he’s predicted an increase in debt that may attract unwelcome interest from ratings agencies. Slower growth, more debt.

Mboweni, to his credit, is a realistic man. He recognises the reality of the current situation, and though the immediate market reaction to his speech was overwhelmingly negative, he has maintained an air of optimism and belief that South Africa can and will be renewed.

There’s a lot to unpack here, so we’ve put together some of the key points.
 

SOEs Continue To Suck The Life Out Of The Country

State-owned vampires continue to burden the public purse as they struggle to get their act together. Until their finances are in order, the government will be granting them further bailouts to the tune of R9.1 billion.

These are allocated as such:

  • South African Airwaves (SAA) will receive a R5 billion bailout;
  • SA Express will receive R1.2 billion, and;
  • The SA Post Office will receive R2.9 billion in new funding.

Furthermore, SARS will receive R1.4 billion over the next three years and the commissions of inquiry into tax administration and state capture will receive a combined R409 million.
 

SAA has a R19.1 billion government guarantee, R14.5 billion of which has been used. Debt of R14.2 billion is maturing in or before March 2019. In 2018/19, government is allocating R5 billion to help the airline repay this debt. In general, SAA is not generating sufficient cash to repay its total debt and will have to negotiate with lenders to refinance or extend maturity dates.

On the dire situation over at SAA, Mboweni said:
 

State Salaries

The salary deals negotiated by Unions earlier this year will end up costing the government an extra R30.2 billion over the next three years, none of which has been budgeted for. With 1.3 million people employed by the state, at an average annual increase in salary of 11.2%, the rate of increase runs higher than inflation.

So, state departments have been ordered to find that R30.2 billion within their existing budgets.

Mboweni said that the public sector wage bill already accounts for 35% of government expenditure, and he would like to bring that down by 5%.

He further stated that if asked, he would advise President Ramaphosa to drastically trim his cabinet of ministers.
 

China is a big economy and I think they have about 25 ministers or something like that. We have no economically‚ financially and politically understandable reason that you can have an executive that's up to 70 people – that's what I would say to him.

Tax Turmoil

Mboweni stated that the fixing of SARS is a matter of urgency.

Despite numerous tax increases implemented in February, tax revenue collections for 2017/18 fell a good R0.8 billion short of the estimation for the 2018 budget. We’re missing the tax target by miles, and Mboweni has been forced to revise down the figures for the next three years.

Revenue brought in over the first six months of 2018/19 had grown by 10.7% compared to the same period last year, but the collection has now begun to slow thanks to the technical recession and a high number of VAT refunds. Treasury is now expecting to collect around R1.35 trillion over the next 12 months – R27.4 billion less than what Gigaba had estimated back in the February budget.

In 2017/18, for the first time since the 2008 global financial crisis, tax revenue growth did not exceed GDP growth.
 

The consolidated deficit, which includes national government, public entities and social security funds, is projected to narrow from 4.2% of GDP in 2019/20 to 4% of GDP in 2021/22

On the bright side, there are no additional tax increases being proposed at this time, but we can expect to see adjustments to personal income tax brackets, levies and excise duties in line with inflation in 2019.

Unfortunately, this includes the strong likelihood of increases on the fuel levy for the next three years – meaning that the price of fuel won’t be dropping any time soon.
 

VAT Relief For Consumers

Earlier this year, a panel was commissioned to come up with a plan to alleviate the impact of the 1% VAT increase on low-income households.

The panel suggested that further items should be considered for zero-rating, and the government has now proposed zero-rate on white bread flour, cake flour and sanitary pads – to take effect on 1 April 2019.

That last one, in particular, has been met with nation-wide acclaim. Research has shown that the average female spends at least R600 every year on sanitary towels. The Department of Women has also developed a framework to provide free sanitary towels to young female students from low-income households.
 

Other Key Highlights

Here are a few of the other key highlights from the 2018 mid-term budget.

  • Gross debt is expected to stabilise at 59.6% of GDP in 2023/24.
  • The state now expects the economy to grow 0.7% in 2018, compared with the 1.5% prediction that was presented by former Finance Minister, Malusi Gigaba, in February.
  • GDP growth is expected to recover gradually to 2.3% by 2021, well short of Ramaphosa’s deliriously optimistic 3%.
  • This is also far from the 5.4% growth that the government’s National Development Plan says is needed to reduce an unemployment rate of just more than 27%.
  • Global economy expected to continue growing at 3.7%
  • The cost of servicing government debt is expected to exceed 2018 Budget estimates by R1 billion in 2018/19, R4.9 billion in 2019/20 and R7.9 billion in 2020/21. This reflects a larger main budget deficit, currency depreciation and higher interest rates. An estimated 15.1 per cent of main budget revenue will be used to service debt in 2021/22 compared with 13.9 per cent in 2018/19.
  • Main budget revenue is projected to increase from 25.7% of GDP in 2018/19 to 26% of GDP in 2021/22. Main budget expenditure is estimated to remain stable at 30.2% of GDP over the medium term 

Where Is Our Money Going?

  • The medium-term expenditure framework has committed public resources of R5.9 trillion over the next three years. Of this amount, R3.3 trillion will be allocated to education, health, social grants and the provision of water and electricity.
  • The government is also proposing the reprioritisation of R32.4 billion over the next three years. R15.9 billion will go towards faster-spending infrastructure programmes and R16.5 billion to various programmes, such as recapitalising the South African Revenue Service (SARS), a minimum wage for community health workers, critical posts and goods and services in health, and streamlining the management of the justice system.
  • Additionally, changes to grant structures amounting to R14.7 billion will promote the upgrading of informal settlements in partnership with surrounding communities. Housing subsidies to the tune of R1 billion will be centralised to better support both middle and lower income home buyers.
  • R1.7 billion has been added to infrastructure spending.
  • R3.4 billion has been allocated in 2018/19 to provide water, upgrade infrastructure and offset the economic costs of drought.
  • R800 million has been added to the school infrastructure backlogs grant to complete approved projects, and R3.4 billion allocated to the education infrastructure grant. This will include further funds to repair infrastructure damaged by the storms and floods in KwaZulu-Natal in 2017.
  • With integrated public transport networks being built and operated in 13 cities, public transport expenditure is expected to increase to R101.1 billion over the medium term.
  • R166 million has been added to the National Health Insurance (NHI) indirect grant component to acquire medical equipment and to design a new academic hospital in Limpopo. R546 million reprioritised within that NHI indirect grant will go to addressing the critical shortage of medical professionals in the health sector, and to procure beds and linen for health facilities.